The unfolding humanitarian catastrophe in Ukraine has highlighted the importance for boards to plan for uncertainty and mitigate future risks by having contingency plans in place. New thought leadership just published by ICAEW is highlighting the role that scenario planning can play in helping prepare for the unknown.
As the conflict rages on, the ramifications for business – including the impact of sanctions, emerging supply chain risks and the financial reporting knock-on effects – are all very real challenges.
But it’s also clear that those organisations for whom contingency planning is a formalised part of their business operations are likely weathering the storm better than those who had not planned for the uncertainty unfolding.
This isn’t about looking into a crystal ball to predict events or their outcomes, but it is about having formalised risk management processes in place that allow you to better respond to changing circumstances.
In particular, a new thought leadership article from ICAEW, Boards, strategic risk and dealing with uncertainty: looking at scenario planning, highlights how scenario planning can be used to help businesses and their boards identify strategic risks and formulate plans that allow them to act more nimbly when unplanned events unfurl.
The article warns that use of forecasting for anything more than basic economic variables such as economic growth or interest rates presents several issues for organisations, not least that forecasts tend to focus on the short term and the risk of group think. Similarly, use of alternative quantitative models has its place to manage financial risks to business plans, it will not prepare you for a significant disruptive scenario such as a war or a game changing innovation, the article warns.
The more uncertainty a business faces, the more useful scenario planning has the potential to be, the article goes on to say. And while the process would typically use a long-term time horizon, the current rapidly changing environment means that companies may wish to develop short-term scenarios that model various different outcomes. Similarly, use of short-term scenario planning is of particular use to businesses that operate in highly dynamic, high-risk environments.
Scenarios aren’t enough in themselves for businesses to weather the storm. For them to be useful as a risk mitigation tool, it is essential that the business involves key stakeholders, including the board, in not just creating the scenarios but also testing existing business plans, developing strategic options, identifying risks and rehearsing what to do and when.
Peter van Veen, the guide’s author and ICAEW’s Director of Corporate Governance and Stewardship, said: "Boards should assure themselves that the company has contingency plans in place and that it uses tools like scenario planning to mitigate potential risks and threats to the business that disruptive scenarios may present".
Read a full copy of the article Boards, strategic risk and dealing with uncertainty: looking at scenario planning.
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